Woori Sale to Spur Mergers as Korea Builds Own Goldman Sachs

Seonjin Cha

December 16, 2013, 4:21 AM EST

The sale of Woori Investment & Securities Co. in the biggest takeover of a South Korean broker may spark consolidation among local securities firms, furthering the government’s goal of creating a national champion.

Woori Finance Holdings Co. today received final bids for the $719 million stake in its brokerage unit from KB Financial Group Inc., NH Financial Group Inc. and PineStreet Group. Yesterday, the Financial Services Commission said it would encourage further consolidation by allowing brokerages to enter into new businesses if they make acquisitions.

The changes signal South Korea’s intent to reshape the securities industry and set up an investment bank big enough to compete globally, highlighted in a 2011 pledge by the financial regulator to create “the Goldman Sachs of Korea.” The FSC in October also began licensing some firms to offer prime brokerage services, margin financing and bridge loans to corporate clients as it seeks to make local securities firms more sophisticated.

“Size does matter for the South Korean brokerage industry,” said Jang Beom Sik, business administration professor at Soongsil University in Seoul. “We simply have too many too small brokerages that can’t compete in the global market. The Woori Investment acquisition will be a trigger for much-needed industry consolidation.”

Woori Finance’s distressed-asset trading unit and leasing company are being sold separately as the government makes its fourth attempt to recoup taxpayers’ money following a bailout more than a decade ago.

Shares of Woori Finance fell 2.4 percent to 12,000 won at the close of trading on the Korea Exchange before the bidding results were announced. Woori Investment slid 0.6 percent to 9,990 won, while the benchmark Kospi index dropped 0.1 percent.

Earnings Pressure

Competition has made more than one-third of the country’s brokers unprofitable, and regulatory changes that will bar brokers from tapping the call-money market are set to put more pressure on smaller firms’ earnings.

Any consolidation in the industry will take time, Financial Services Commission Chairman Shin Je Yoon said Dec. 9.

“Creating the Goldman Sachs of Korea is the eventual goal, though I also know we need to proceed step by step,” he said, echoing a phrase used in July 2011 by then-FSC Commissioner Hong Young Man. “The sale of Woori Investment will be the starting point for industry reforms.”

Korea’s brokerages, which had a combined 300 trillion won ($285 billion) in assets as of the end of June, the latest date for which figures are available, lag far behind global rivals. New York-based Goldman Sachs Group Inc. had $938 billion at that time, while Nomura Holdings Inc., Japan’s largest brokerage, boasted $422 billion, according to data compiled by Bloomberg.

National Champion

The sale of Woori Investment, Korea’s third-largest by market value, may take the government a step closer to creating a national champion by increasing competitive pressure on smaller brokerages.

KB Financial, NH Financial and South Korean investment advisory firm PineStreet today submitted offers for a package of assets including the 38 percent stake in Woori Investment as well as the savings bank, asset manager and life insurance units, the bidders said separately in text messages and a regulatory filing. The shares in South Korea’s biggest brokerage by assets have a market value of about 756 billion won. Financial terms of the bids weren’t disclosed.

A sale of Woori Investment to KB Financial, owner of Korea’s largest lender, may shift the balance of power among the nation’s securities firms.

Bond Underwriting

Buying Woori Investment, ranked third among underwriters of domestic bonds this year, would extend the lead that KB Financial’s top-ranked brokerage unit has over rivals such as Korea Investment & Securities Co., data compiled by Bloomberg show. In equity offerings, Woori’s fifth place ranking would help KB Financial climb from No. 24, the data show.

In advising on mergers and acquisitions involving a Korean target, Woori’s No. 2 rank this year would help KB Investment rise from its position at No. 16 following an acquisition, the data show.

“The takeover of Woori Investment will be the first step toward creating a new group of top brokerages in terms of scale and quality,” KB Financial said in an e-mail.

NH Investment, a Seoul-based brokerage that accounts for about 1 percent of Korea’s equity broking market, said it expects to “take the lead in terms of scale and competitiveness” if its bid succeeds. The company isn’t placed among the top 25 underwriters of bonds or shares in the nation.

‘Darker’ Future

“The future will be darker for us if we fail to secure capital and infrastructure competitive with the leading firms,” NH Investment said in an e-mailed response to questions, without giving details.

PineStreet is interested in buying a brokerage because it doesn’t have any operations in the industry, Kim Myung Jeon, vice chairman of the Seoul-based investment advisory firm, said by phone today, without elaborating.

Korea’s FSC yesterday said brokerages making acquisitions that boost their equity capital by 500 billion won to more than 2.5 trillion won would be eligible for the new investment banking licenses. Firms making smaller purchases might be allowed to enter new businesses such as running pension fund trusts, the regulator said.

That may add to the pressure on Korea’s weakest brokerages to consolidate, as their largest rivals have already been awarded licenses by the FSC on Oct. 30 to offer leveraged trading and securities lending to institutional clients including hedge funds and to provide acquisition financing to corporate clients.

New Businesses

Woori, Daewoo Securities Co., Samsung Securities Co., Korea Investment and Hyundai Securities Co., Korea’s five biggest brokerages by assets, were among the firms to get approval for entering into the new businesses. Korea Investment and Hyundai Securities didn’t respond to requests for comment.

The government could provide another catalyst for consolidation by selling Daewoo Securities, the country’s second-largest brokerage by market value, according to Yoo Sang Ho, an analyst at HI Investment & Securities Co.

Daewoo Securities, Korea’s second-largest brokerage by market value and assets, hasn’t considered consolidation since the government hasn’t yet decided to divest, the firm said in an e-mailed response to questions. The government said in August it would hold on to its controlling 43 percent stake “for the time being.”

Samsung Securities, the country’s largest brokerage by market value, doesn’t “expect a big impact from the emergence of a new, merged firm,” the company wrote in an e-mailed response to questions. The stock, which in November fell to 44,050 won or the lowest in more than 6 1/2 years, ended last week at 44,200 won.

Profit Slump

Korean brokerages’ profitability is worse now than it was during the peak of the global financial crisis in 2008. Of the 62 companies operating in the nation, including foreign firms, 26 posted losses for the six months ended Sept. 30, with their combined earnings plunging 63 percent from a year earlier to 251.6 billion won, according to data from the Financial Supervisory Service.

That’s the worst-performance for a half year since Korean brokerages posted a combined 81.3 billion-won loss for the six months to March 2005 in the aftermath of a credit-card crisis in the nation.

Commissions Decline

Brokerage commissions, which accounted for more than 60 percent of the industry’s fee revenue, fell 2.4 percent during the six months to September, the FSS said on Nov. 11. Revenue from underwriting fell 13 percent and income from advising on takeovers declined 6.7 percent, according to the FSS data.

Wider use of online trading and shrinking trading volumes spurred competition and squeezed earnings, according to the Korea Institute of Finance. Average fees for executing stock trades shrank to 0.09 percent in 2012 from 0.21 percent in 2000, according to a Nov. 22 estimate from the institute.

To cope with the squeeze on profits, Korean brokerages cut the number of branches by 11 percent to 1,509 in the 12 months ended Sept. 30 and reduced their workforce by 4.3 percent to 41,223, according to the FSS.

Of the 13 brokerages with more than 1,000 employees, Mirae Asset Securities Co. cut jobs by 9.8 percent at the end of June from a year earlier, while Tongyang Securities Inc. pared its staff by 9.8 percent and Samsung Securities Co. shrank its workforce by 9.4 percent, regulatory data show.

“Brokerages should pursue rapid consolidation through M&A to secure competitiveness,” Lee Man Hee, head of the retail division at Mirae, said at a Nov. 26 conference in Seoul. “Broking fees are falling, opportunities for high return are narrowing and our clients are also suffering. All in all, this signals changes in the brokerage industry.”

‘Ripe’ Environment

Still, the Woori deal and the pressure on profits may not be enough to convince brokers to merge, said Lee Seok Hoon, a research fellow at the Korea Capital Market Institute.

“In the history of the U.S. brokerage industry, takeovers happened when markets soured,” the Institute’s Lee said. “Here, the environment for industry consolidation is ripe, but whether it will actually happen is a different matter.”

While the smallest and least profitable brokerages may be eliminated, mid-sized firms that aren’t losing money may choose to continue operations while awaiting a turnaround, Lee said.

Cultural Barriers

“Culturally, owners are very reluctant to let go of management control,” FSC Director General Seo Tae Jong said at a press briefing on Dec. 13.

The FSC has introduced other reforms in recent months to make consolidation attractive to such firms.

Most brokerages will be barred from borrowing on the call money market starting in 2015, the FSC said on Nov. 20. The change, aimed at making Korea’s money market more stable, may boost funding costs at small brokerages that are overly dependent on overnight financing, the regulator said.

“Consolidation in the South Korean securities industry is inevitable, and it’s in the interests of the Korean financial sector to move more quickly,” John Walker, the country head for Macquarie Group Ltd.’s Korean operations, said in an interview. “South Korea needs a small number of leading brokerage firms that have enough scale to work as investment banks and find unique profit sources beyond broking fees.”

Tongyang Bid

KB Financial is considering a bid for Tongyang Securities, Seoul-based KB said in a regulatory filing today. Tongyang was ranked No. 4 among underwriters of domestic bonds last year, according to data compiled by Bloomberg. The broker may be put up for sale after several of its shareholders went into court receivership, HI Investment’s Yoo said.

The industry’s current woes may help improve the rewards for the brokerage that wins Woori Investment, he said.

“Having a strong owner such as KB Financial or NH Financial would help Woori Investment further strengthen its market leadership position,” said Yoo. “Someone who makes a smart move in this bad environment will prosper when times improve.”

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